Handout 1c - Handout 1c Economic Actors and Markets Spring...

Handout 1c – Economic Actors and Markets Spring 2007 Page 1 of 3 1. The Economic Way of Thinking The economic way of thinking was an expression coined by the late Paul Heyne. The economic way of thinking is choice . We make choices in response to scarcity – unlimited wants and limited resources. According to the economic way of thinking, every choice or action involves a foregone opportunity or cost. This is what we refer to as an opportunity cost . As a result, an individual compares the benefits of each action to its opportunity cost when making a decision. An individual does not compare the total benefit and total cost cost, but rather the additional or marginal benefit and marginal cost . The economic way of thinking tells us that an individual will keep doing something so long as the marginal benefit exceeds the marginal cost. Once the marginal cost equals the marginal benefit, an individual will stop his or her activity. In making a decision, an individual considers the relative price of an action. You decide what to buy in the grocery story by considering the price of an item relative to other items. You make this calculation implicitly because you know what a dollar can buy. For instance, a price of $10 for a candy bar appears expensive because $10 could buy you a CD or a t-shirt or lunch! An increase in a relative price will induce two effects.

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